Credit crunch still hinders economic activity
Although the recession in the UK economy officially came to an end in the final quarter of 2009, growth since then has been pedestrian and far below the pace historically associated with the ‘recovery’ phase of the economic cycle.
One important reason for this has been that credit has remained in very short supply, with the result that companies have experienced real difficulty financing expansion and individuals have found mortgage debt and finance for other big ticket items very hard to come by.
Mortgage advances in July were just £86m compared with average advances of £10bn per month at the peak, whilst overall net lending to individuals is running at just 10 per cent of the levels typical of the years 2003-2008.
These shortages are despite the huge amounts of liquidity pushed into the economy by the government to support the economy and reflect failures in the financial transmission system, in particular the weakened condition of the banks and other financial organisations which traditionally have been the conduits of finance to the end user.
These factors are compounding the negative influences of low wage growth, rising unemployment and high existing levels of debt. UK consumers are the most heavily indebted in the G7 group of nations, with average debts of 180per cent of personal disposable income.
Many are already experiencing servicing problems; total loan write-offs against borrowings by individuals amounted to £3.5bn in the second quarter of this year, of which £2.1bn was written off from credit card debts. Credit card companies that were chasing new clients only a couple of years ago are now turning down 48 per cent of new applications.
What this means is that many companies and most households have to finance higher expenditure from within their available resources rather than from borrowing and a critical help in this has been the fall in interest rates. Average mortgage costs are now 3.63 per cent and the gains to disposable income from these lower borrowing costs are being spent rather than saved or used to repay borrowings.
The gradual improvement in underlying economic conditions will help improve the position over time, but for the moment the low interest rates which are so frustrating for those with cash deposits are critical to keeping the recovery on track.
Author: John Kelly
John Kelly is head of client investment at CCLA.
There are no comments on this article. Be the first to comment.